Lots have been written lately about the use of Cap-and-Trade dollars to fund the building of the high-speed rail project. There are two problems first of all; there is a huge capital gap and cap-and trade is merely a Band-Aid and it is most unlikely it will fill that gap even for the first 300 miles of construction.

Governor Brown wants $250 million in this coming year’s budget for the High-speed rail project. In the future he wants to take 1/3 of the funds generated through these cap-and-trade auctions.

Brown also wants to use the remaining $400 million loan remaining out of the $500 million the Governor borrowed last year from the Cap-and Trade revenues for the general funds, and give it directly to the High-Speed Rail project. Note: Last year the auction proceeds were $542 million for five auctions so he basically wiped them out.

Remember AB-32 was designed to reduce Green House Gases (GHG) to 1990 levels by 2020 not to increase them. The cap-and-trade funds are generated by businesses that pollute the air. The proceeds are supposed to be used for projects that have an impact on green house gas emissions such as home improvements that are energy efficient, allowances for more energy efficient vehicles etc.

High-Speed Rail’s construction period will increase green house gases due to the building materials, concrete etc. In other words they will pollute the air but simultaneously have their hand out to receive auction proceeds. The first operable segment from Madera to the San Fernando Valley at the very earliest won’t be ready to operate until 2021 to 2022, if that is, they can find the capital to complete it. Remember the deadline is 2020.

Opinions from many experts and environmentally friendly groups:

The Californians Advocating Responsible Rail Design (CARRD), co-founder Rita Wespi has a strong opinion on this, “We've got to convey that carbon emissions saved today is worth more than the equivalent in, say, 30 years from now. Once a glacier melts, there is no going back. They will say that HSR is an investment in the future. This isn't the same type of investment as money.

“We can't borrow emission savings and pay it back in the future with greater savings. How the state prioritizes its GHG programs today has enormous consequences that cannot be fixed or undone. The best they can do by way of compensating for mistakes made today is to try extra hard to keep future environmental damage to a minimum,” said Wespi.

This isn’t the kind of issue, one can play with, this shouldn’t be about politics; the result of the project’s construction will be damaging the environment for decades, the very air people breath in the Central Valley. An area of California that suffers from the highest asthma rates in the state and only will get worse with construction activity. Planting some trees and buying school buses with lower emissions, won't cut it."

TRANSDEF, a site dedicated to environmental causes shows how rail authority’s report fails the test. David Schonbrunn, President of the organization published this factual, no holds barred review of the high-speed rail project’s report. http://transdef.org/Blog/Whats_hot.html

Gary Patton, environmental attorney, also has a strong opinion on slicing out chunks of money for the use of the high-speed rail project. “The use of Cap And Trade funding for HSR would be a MISUSE of this funding, and would mean diverting that funding from projects that would actually reduce carbon emissions to a project that will actually INCREASE such carbon emissions over the next thirty years.

The Global Warming crisis is real. We need to do everything we can, in California and globally, to reduce Greenhouse Gas Emissions (GHG). There are many meritorious uses proposed for the use of Cap And Trade funds. We cannot afford to “waste" money that should to good projects that will actually reduce GHG emissions by spending these limited funds on a project that won't reduce emissions"

Financial experts give thumbs down to Cap-and-Trade:

Bill Warren, Masters Graduate in Finance at Stanford and co-author of 44 papers, says this about the financial impacts of the High-Speed Rail project, “ The Authority and the Governor are asking the citizens to build a big house they can all live in, with debt that can only be serviced by two future revenues flows, 1) unknown Cap-and-Trade funds (which is like an annual gift from an old uncle who is on life support) and operating profits (like what is left over from the monthly paycheck after you have bought your food and paid your utility bill). Not exactly a winning strategy, based on the experiences of the last 10 years in the US economy and the real estate bust.”

The briefing paper regarding California’s proposed high-speed rail project can be viewed or downloaded from the following Web address.

Warren said with, “And the people at the Authority and the Governor will not be around when the bills can not be paid - just like the guy who sells you the house you really will not be able to afford down the road”

“The kicker is that Mr. Steinberg's spending plans would all be subject to annual legislative appropriations except for high-speed rail, whose revenue stream would be guaranteed. The Senate leader suggests that the cap-and-trade revenues could be securitized to finance the $68 billion bullet train.

Just one problem: The cap-and-trade revenues must be used to reduce carbon emissions, and as the state legislative analyst has noted, the train's construction will increase emissions.

We've written for years that cap and trade's real purpose was to create another revenue stream for politicians, and California businesses are suing the board for illegally imposing a tax disguised as a regulatory fee. Mr. Steinberg's "investment strategy" proves their case.”

March 27, 2014 Senate Transportation Hearing on High-Speed Rail: Opinions about using cap-and-trade:

Discounting wildly optimistic numbers of how much money the cap-and-trade auctions will raise, could be billions just for high-speed rail according to project proponent, Robert Cruickshank, what do some pretty objective sources believe? By the way only $542 million was raised last year not $1.4 billion though the revenues are expected to rise.

Let’s look at commentary from Lou Thompson, director of the Independent Peer Review Group for the high-speed rail project and the Legislative Analyst’s office.

The Legislative Analyst has remained consistent in their statements about the rail project in a March 27, 2014 senate hearing. They have concerns about the funding of the project and use of cap-and-trade dollars. The Director of the Peer Review Group, Lou Thompson, who is an advocate for the high-speed rail project, has his concerns about the funding gap and has concerns about the logistics of the blended system in Northern California.

Legislative Analyst Office (LAO):

LAO office representative, Jeremy Fraysse confirmed what others reported. Fraysse said there’s a $21 billion deficit and it’s on the state to address the gap. Looking at the 2014 Draft Business Plan and CEO Jeff Morales testimony, it is unlikely that federal funds will be forthcoming with more grants or private funds will be available. Fraysse said so it appears it’s on the state to address the shortfall of funding. See his handout.

Fraysse reported that this year the Governor wants $250 million this year and starting in 2016, 1/3 of an unknown number. It’s unclear how much cap and trade will be available therefore we don’t know if there will be enough. Fraysse calculates the Authority needs approximately $4 billion per year to complete the first leg by 2021. The Governor also proposes his repayment of $400 million borrowed from Cap-and-Trade last year, to go directly to the high-speed rail project.

He points out that another concern is Federal Railroad Administration reserves the right to take other railway or transportation funding if matching state funds are not forthcoming.

Fraysse confirmed there aren’t any changes in the Legislative Analyst’s Office about previous positions about cap and trade. The LAO’s office has previously recommended guidelines need to be developed concerning who gets the funds and unsure if the Rail project qualifies since it won’t be operational until after AB 32’s which is bringing GHG emission levels to 1990 levels by 2020. The train project doesn’t expect to be operational until 2022. He points out that giant construction will generate emissions during that period, which they may buy credits to offset emissions. But they would receive cap-and-trade funds in the years it is buying offsets.

Fraysse said, “His office recommends that the Legislature require the Administration to come forward with the funding plan that details exactly how this deficit will be addressed and what the funding sources will be in each year to support the capital costs of the program. See Fraysse’s complete testimony: https://www.youtube.com/watch?v=1qwhoM9hcNc

Lou Thompson, Chairman of the Independent Peer Review Group:

Thompson believes the authority continues make progress on their business plan. “It covers the issues but it doesn’t change the question of whether we should go ahead with the project or not.” He says this still paper projections analysis, no real experience yet. “It’s all about what we’re going to do, not what we have done.” The Independent Peer Review Director believes the business plans have evolved and getting better year-to-year. Senator DeSaulnier interjected it was not enough.

Thompson offers two issues. The financial gap, it’s still there. One is he confirms that completing the IOS has a gap of about $20.9 billion. He says after next year the Governor is proposing that high-speed rail take 1/3 of the auction proceeds but like the LAO, Thompson says the question remains “1/3 of what.” While the gap could partially filled by cap-and-trade funds even at the highest estimate the LAO stated of $15 billion through 2020, they still are short. Thompson says still leaves a gap of $13 to $14 billion to fund the first segment, the Initial Operating Segment from Madera to the San Fernando Valley.

Though there are plenty of skeptics across both sides of the aisle regarding this rail project, people in Sacramento say that the Governor has threatened to pull campaign funding for anyone who abandons the train project. If true, this amounts to political blackmail.

It will be interesting to see if the Legislature takes the moral high ground, examines the critical factors regarding the high-speed rail project and votes their conscience – or will it be politics as usual.

Remember there is safety in numbers, what if 15 Democrats signed a letter that said they disapprove of the project. Would there be retaliation on such a grand scale?

Legislative representatives must remember they have a fiduciary duty to protect the public; if they don’t the public will surely remember at election time. If their representatives fail them, the public will only have the courts left to enforce the state’s laws regarding the high-speed rail project.

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Kathy Hamilton has been writing about High Speed Rail for over 2 years. She follows key meetings in and out of Sacramento. In the past she has worked as a real estate broker, was in corporate relocation management and was a Senior Manager in International Human Resources for a large public accounting firm.